Last modified Wed., November 05, 2008 - 04:00 PM
Originally created Thursday, November 6, 2008

Are you eligible for an interest rate reduction?

By Lt.j.g. Ryan Charles, Navy Legal Southeast

Servicemembers paying interest rates in excess of 6 percent per year may be entitled to relief under federal law. Section 527 of the Servicemember's Civil Relief Act (SCRA) provides that "[a]n obligation or liability bearing interest at a rate in excess of 6 percent per year that is incurred by a servicemember, or the servicemember and the servicemember's spouse jointly, before the servicemember enters military service shall not bear interest at a rate in excess of 6 percent per year during the period of military service." This means that if you incurred a debt in the form of a mortgage, car loan, credit card balance, or just about any other financial liability, prior to entering military service, you may be entitled to reduce your interest payments to 6 percent during the entire period of active duty service. Please note, however, that the reduction does not apply to federally guaranteed student loans.

A servicemember intending to invoke the 6 percent interest rate cap must strictly comply with the SCRA's notification procedures. The servicemember must provide the creditor with written notice and a copy of the military orders calling the servicemember to military service. Generally, the written notice should be a letter to the creditor setting forth: (1) the basis of the servicemember's qualification for the 6 percent interest cap, (that the debt giving rise to the interest payment was incurred before the servicemember went on active duty); and (2) a request that the creditor reduce the servicemember's interest rate to 6 percent pursuant to the SCRA. The military orders must show that the servicemember was called to military service after the debt or obligation was incurred.

A court may grant a creditor relief from the interest rate reduction if the creditor can show that the servicemember's ability to pay interest in excess of 6 percent is not materially affected by reason of the servicemember's military service. However, the burden is on the creditor to prove that this is the case. Still, it is a good idea for the servicemember to include a statement in the written notice to the creditor that his or her ability to pay interest in excess of 6 percent has been "materially affected" by reason of entry into military service.

The SCRA imposes a timeline within which requests for interest rate reductions must be submitted. The servicemember has until 180 days after termination or release from military service to submit written notice to the creditor. This means that the interest rate reduction applies retroactively where a servicemember has been paying interest in excess of 6 percent after being called to military service. The creditor should account for any interest payment in excess of 6 percent made by a sevicemember since the date of active duty. However, it is preferable to provide written notice as soon as possible after being called to active duty in order to avoid disputes with creditors and complications in calculating over interest payments. Also, it is the servicemember's obligation to inform a creditor if military service is subsequently terminated. Otherwise, the former servicemember is liable for any interest forgiven by the creditor after being released from military service.

The SCRA mandates that interest in excess of 6 percent is "forgiven," and cannot simply be deferred until the period of military service ends. Also, the SCRA broadly defines "interest" to include service charges, renewal charges, fees, or any other charges, except bona fide insurance. This protects servicemembers from creditors trying to cleverly disguise the forgiven interest as "legitimate" charges and fees. Moreover, the SCRA forbids creditors from taking adverse action against a servicemember's credit report for requesting an interest rate reduction pursuant to the SCRA.

Remember, the interest rate reduction does not apply to debt incurred by a spouse alone. As a second practice point, some creditors are willing to lower interest rates below 6 percent (even to 0 percent) for pre-military debt. Therefore, servicemembers should contact each individual creditor to find out its policy before sending written notice and locking in the 6 percent cap. As a final word of caution, debts incurred by a servicemember after entering military service are not subject to the 6 percent interest cap and will incur interest at the normal percent.

If you believe you might qualify for an interest rate reduction, visit a legal assistance attorney. Call them at the following numbers: Jacksonville, Florida at (904) 542-2565 ext. 3006; Mayport, Florida at (904) 270-5445 ext. 3017; Kings Bay, Georgia at (912) 573-3959; Charleston, South Carolina at (843) 764-7642/44; Gulfport, Mississippi at (228) 871-2620; Pensacola, Florida at (850) 452-3734; New Orleans, Louisiana at (504) 678-4692; Corpus Christi, Texas at (361) 961-3765; and Fort Worth, Texas at (817) 782-6009. This article is not intended to substitute for the personal advice of a licensed attorney.